So-called target benefit pension plans (TBPs) are a viable design for workplace pensions in Canada and should be made available more, recommends a new report from a Canadian Institute of Actuaries (CIA) actuarial task force.
Specifically, the CIA report makes a series of recommendations for enhancing the availability of TPBs, which can fall between traditional defined-benefit (DB) pension plans and defined-contribution (DC) pension plans in terms of the contributions that firms and employees make and the security of the benefits they provide.
The report defines a TBP as a “collective, pre-funded pension plan pooling both economic and demographic risks, with a predefined retirement income goal (the ‘target benefit’),” for which the employer makes predefined contributions but the plan members’ benefits may be adjusted periodically upward or downward relative to the original target.
The CIA formed the task force to investigate the TBP concept in response to increasing interest from both regulators and the public. Its report concludes that these plans are viable and should be more available to the Canadian pension industry, but that also “a wider spectrum” of pension plan designs should be considered than has been to date.
The CIA report also notes that risk management — including the risks facing the plan as a whole, how risks are shared by different plan members and the impact of intergenerational risk sharing — is critical to these plans. It adds that explicit policies setting out the plans’ benefits, funding and investment approach is also an essential element of plan design and management.
The regulation of TBPs should not be one size fits all, the CIA report recommends. Instead, it suggests that regulation should take into account where a particular pension plan falls on the spectrum between traditional DB pension plans and those that function more like DC pension plans that have more volatile benefits.
In particular, pension plans that are more DC-like should not be subjected to the more rigorous requirements that apply to DB plans in order to minimize the volatility of benefits, the CIA report recommends.
The report acknowledges that “a perfectly flexible” and individual regulatory approach may be unrealistic given the limited resources of pension regulators. So, it recommends that policy-makers consider “Alberta-style regulations” for TBPs, with some minor modifications and an opt-out provision, which “could achieve a reasonable balance between the needs of various stakeholders.”
“For this report, we wanted to look at TBPs with the goal of serving all stakeholders by contributing our unique expertise as risk professionals. Our hope is the report encourages informed discussion and decision-making around pension design and regulation,” said Barbara Sanders, chairwoman of the CIA task force.
“A challenging investment environment and dwindling corporate pension guarantees are forcing pension organizations around the world to respond and adapt,” she added. “We support TBPs as a viable pension plan alternative because they can effectively and efficiently meet the needs of the Canadian public with respect to generating lifetime retirement income.”